Community Healthcare Trust Inc. (CHCT) is a healthcare-focused real estate investment trust (REIT) that owns and acquires properties leased to hospitals, doctors, healthcare systems, and other medical service providers. Despite its solid performance and conservative approach, the company has flown under the radar for many investors. However, a closer look reveals a compelling investment opportunity in this overlooked healthcare REIT.
Business Overview and History Community Healthcare Trust was organized in the State of Maryland on March 28, 2014, and is headquartered in Franklin, Tennessee. The company is a fully-integrated healthcare REIT that acquires and owns real estate properties leased to hospitals, doctors, healthcare systems, and other healthcare service providers. CHCT began operations in 2014 and experienced rapid growth through strategic acquisitions. By the end of 2015, the company had built a portfolio of 42 real estate properties with a total gross investment of approximately $280 million. This growth trajectory continued, with gross investments reaching over $700 million by the end of 2020.
A significant milestone in CHCT's history came in 2015 when the company completed its initial public offering, and its common stock began trading on the New York Stock Exchange. This move provided CHCT with access to public capital markets to fund its growth strategy. The company has continued to leverage the capital markets through additional equity and debt offerings over the years.
Despite its overall success, CHCT has faced some challenges. In 2023, two of the company's tenants, Genesis HealthCare, filed for bankruptcy and rejected their leases, forcing CHCT to find new tenants for those properties. Furthermore, in 2024, the company encountered issues with one of its larger tenants, a geriatric psychiatric hospital operator, due to staffing and census problems. This led CHCT to place the leases on non-accrual status and record a significant credit loss reserve. However, the company has worked diligently to stabilize this tenant's operations and restore consistent rental income from these properties.
As of September 30, 2024, Community Healthcare Trust's portfolio has grown to include 198 properties across 35 states, totaling approximately 4.4 million square feet with a 91.3% occupancy rate. The company's gross investments have reached approximately $1.14 billion, demonstrating its commitment to its growth strategy and ability to navigate challenges in the healthcare real estate sector.
Financial Performance and Solvency Community Healthcare Trust's financial performance has been solid and consistent. For the year ended December 31, 2023, the company reported total revenue of $112.84 million, up from $97.68 million in the prior year. Net income for 2023 was $7.71 million, compared to $22.02 million in 2022. The decrease in net income was primarily due to higher interest expense and a one-time credit loss reserve of $11 million related to a tenant.
In the most recent quarter (Q3 2024), CHCT reported revenue of $29.64 million, representing a year-over-year growth of 3.1%. Net income for the quarter was $1.75 million. The increase in revenue was mainly driven by rental income from properties acquired in 2023 and 2024, partially offset by the impact of a tenant being placed on cash basis accounting, which reduced revenue by approximately $0.8 million.
Operating cash flow (OCF) for the full year 2023 was $61.38 million, with free cash flow (FCF) of $42.40 million. In Q3 2024, OCF was $13.85 million, and FCF was $6.66 million.
Despite the impact of the credit loss reserve, Community Healthcare Trust has maintained a strong balance sheet. As of September 30, 2024, the company had total assets of $981.78 million and total liabilities of $504.63 million, resulting in a debt-to-total-capitalization ratio of approximately 40%. This conservative leverage position provides the REIT with ample financial flexibility to fund future growth initiatives.
Liquidity In terms of liquidity, Community Healthcare Trust reported $2.84 million in cash and cash equivalents as of September 30, 2024, and generated $43.22 million in operating cash flow during the first nine months of 2024. The company's free cash flow for the same period was $38.47 million, indicating its ability to comfortably cover its dividend payments and capital expenditures.
The company's debt-to-equity ratio stands at 0.99, with a current ratio and quick ratio both at 1.04. As of September 30, 2024, CHCT had $25 million of borrowing capacity remaining under its $150 million revolving credit facility. In October 2024, the company amended its credit facility to increase the revolving credit facility to $400 million and extend the maturity to October 2029, providing the company with enhanced financial flexibility.
Dividend and Shareholder Returns Community Healthcare Trust has a strong track record of providing stable and growing dividends to its shareholders. The company has increased its quarterly dividend every quarter since its IPO, with the most recent increase to $0.465 per share, equating to an annualized dividend of $1.86 per share. This dividend yield of approximately 12% is one of the highest in the healthcare REIT sector. The company's dividend payout ratio was 85% in Q3 2024, indicating that the dividend is well-covered.
The company's conservative approach to leverage and disciplined capital allocation have also contributed to shareholder value creation. Over the past three years, Community Healthcare Trust has generated a total shareholder return of 32%, outperforming the broad REIT market, as represented by the FTSE Nareit All Equity REITs Index, which returned 28% during the same period.
Risks and Challenges While Community Healthcare Trust has demonstrated resilience, the company does face some risks and challenges. The healthcare industry is subject to regulatory changes and reimbursement pressures, which could impact the financial stability of the REIT's tenants and, in turn, its rental income. Additionally, the company's focus on smaller, single-tenant properties may expose it to higher tenant concentration risk compared to REITs with larger, multi-tenant properties.
Furthermore, the ongoing COVID-19 pandemic and its lingering effects on the healthcare sector could pose challenges for the REIT's operations and tenant base. Community Healthcare Trust has weathered the pandemic thus far, but continued uncertainty in the market could impact its future performance.
Outlook and Future Growth Despite the potential risks, the outlook for Community Healthcare Trust remains positive. The company's diversified portfolio, conservative financial profile, and focus on the essential healthcare sector position it well to navigate the challenges ahead. The healthcare real estate industry has seen steady growth, with a compound annual growth rate (CAGR) of around 6-8% over the past 5 years, and CHCT has been able to capitalize on this growth through strategic acquisitions and portfolio management.
Looking ahead, Community Healthcare Trust has several growth initiatives in the pipeline. The company has three redevelopment projects expected to commence leases in Q1 2025, which are projected to generate around $750,000 in additional annual rent. Additionally, CHCT has four properties under definitive purchase agreements for an aggregate expected purchase price of $8.8 million, with expected returns of 9.29% to 9.5%. The company also has seven properties under definitive agreements to be acquired after completion and occupancy for an aggregate expected investment of $169.5 million, with expected returns of 9.1% to 9.75%.
To fund these near-term acquisitions while maintaining a modest leverage profile, CHCT is evaluating capital recycling opportunities, including selective asset sales. This strategic approach to growth and capital management demonstrates the company's commitment to creating long-term value for shareholders.
Conclusion In conclusion, Community Healthcare Trust is an overlooked healthcare REIT that deserves greater attention from investors. With its solid financial foundation, disciplined growth strategy, and attractive dividend, the company offers a compelling investment opportunity in the dynamic healthcare real estate sector. The REIT's consistent performance, conservative financial management, and pipeline of growth initiatives position it well for continued success in the evolving healthcare landscape.